Experience shows that IP is often given only secondary consideration in transactions, even in due diligence, unless the acquisition is being made because of the target’s specific IP. However, in M&A transactions, intellectual property rights are regularly of crucial importance in ensuring that the acquired company can carry out its business unhindered and that there are no conflicting third-party rights. It is therefore of the utmost importance to recognize and minimize IP related risks in transactions to avoid a rude awakening. The saying ‘forewarned is forearmed’ really applies here. So, in a nutshell, what are possible issues that one should watch out for?
The first question is, of course, whether the IP of the target is protected in the relevant territory at all, for example, by corresponding patents, trademarks or designs. The next step is to find out whether this protection covers the business and whether the corresponding fees for the IP rights have been paid.
If there are any inventions, it should be ensured that the target company actually owns them. For example, it should be clarified whether inventions to which the German Employee Inventions Act (ArbNErfG) applies and that were reported before 1 October 2009 were correctly claimed. It is also not uncommon for the question to arise as to whether inventions of freelancers or inventions of persons who are not subject to the German Employee Inventions Act, such as managing directors of limited liability companies (GmbH Geschäftsführer), have been legally transferred to the company to be acquired. If the review of respective contracts reveals deficiencies, it may be much easier to persuade the target company to conclude appropriate transfer agreements with the workforce during the transaction process than if the transaction has already been completed.
If R&D contracts or similar collaborations have been concluded by the target company, it is important to examine carefully how ownership of the developed IP and know-how has been regulated and whether the collaboration partner or even third parties have use-rights in the developed IP.
In addition, license agreements between the target company and third parties under which essential IP is licensed should be examined regarding their scope and granting of rights as well as with regard to the third party's options and conditions for termination and the agreed contract term.
The risk that the target company's business may infringe the IP rights of third parties can hardly be completely excluded and can only be mitigated by appropriate guarantee and/or indemnity clauses. Nevertheless, it is advisable to clarify whether the target company has had corresponding freedom-to-operate analyses carried out and to what extent and detail these analyses have been carried out.
When it comes to protecting unregistrable rights such as know-how, it makes sense to examine the precautions and strategies that the target company takes to prevent an unwanted outflow of know-how.
